The marijuana industry still lives in the shadow of controversy. Most still remember Nancy Reagan’s “Just Say No” campaigns and apply them to this formerly illegal substance.
However, the marijuana industry is also gaining ground among investors. A recent set of new deals consolidating some major growers has sent some popular cannabis names on an upward trajectory in recent trading.
Four major pot stocks saw jumps in early trading today, although these stocks gave back much of their gains. This includes Tilray (TLRY), which was up 10.9% in premarket trading (now up 3.9%). It’s easy to be bullish on the marijuana industry, but every new industry will be subject to volatility. This one is no exception. I am bullish on TLRY.
Tilray stock has been on a generally downward track since this time last year. Some of the other gainers, like Sundial Growers (SNDL), are on a similar downward track after seeing an extra 8.6% jump in premarket trading (now up 5.3%).
Aurora Cannabis (ACB), which was up 7.6% in premarket (now up only 2.2%), is also coming off some recent lows. Finally, Canopy Growth (CGC) stock, up 2% compared to 4% in premarket, is rounding out the pack of sudden gainers coming off downward trajectories.
The rising tide that lifted all these boats came from two major developments in the pot sector. First, Aurora Cannabis purchased TerraFarma, the parent company of Thrive Cannabis, for C$38 million in cash and stock.
The move gives Aurora Cannabis access to Thrive’s Greybeard strain of marijuana plant, and the deal is expected to close in H1 of Fiscal 2023.
Additionally, Cresco Labs (CLRBF) is set to buy Columbia Care (CCHWF) in an all-stock deal worth around $2 billion. Columbia Care shareholders are to receive 0.5579 of a share of Cresco Labs for each share of Columbia Care owned.
Wall Street’s Take
Turning to Wall Street, Tilray has a Hold consensus rating. That’s based on three Buys, seven Holds, and one Sell assigned in the past three months. The average Tilray price target of $10.21 implies 73.3% upside potential.
Analyst price targets range from a low of $6 per share to a high of $23 per share.
Sundial Growers, meanwhile, has neither an average price target nor rating, as not enough analysts have stepped in to make projections on it.
Aurora Cannabis is considered a Moderate Sell, with five Holds and three Sells in the last three months. The average Aurora Cannabis price target of $5.21 suggests 38.6% upside potential. Analyst price targets range from a low of $3.97 per share to a high of $6.03 per share.
Finally, Canopy Growth is considered a Moderate Sell as well, based on one Buy, four Holds, and four Sells released in the last three months. The average Canopy Growth price target of $8.74 suggests 19.2% upside potential. Analyst price targets range from a low of $5.96 per share to a high of $13.51 per share.
Hedge Funds Ditching Pot Stocks, Dividends Impossible to Find
Meanwhile, based on the word from the TipRanks 13-F Tracker, pot stocks are looking like a bad idea to hedge funds out there. All four of the pot stocks that saw gains today have also seen declining hedge fund involvement over the last several months.
Tilray has been in a state of continuing decline since March 2021. Canopy saw a brief resurgence in September 2021, but that retracted by January 2022. Aurora has been losing ground since March 2021, after spiking growth in both January and March. Finally, Sundial has been losing ground since July 2021.
None of those four stocks offer a dividend either.
A Speculative Opportunity Awaits in a Potentially Maturing Market
It’s easy to forget, sometimes, that the marijuana industry has only been legit for a comparatively short time. The earliest example of marijuana legalization in the U.S. only goes back to 1996.
That’s when California legalized marijuana for medical reasons only. California amplified that to recreational use in 2016. The market for marijuana, in general, has largely been limited to back-alley deals for years. In 11 states in the U.S., it still is.
So what we have here is a very young market. Young markets are, by definition, chaotic things with plenty of volatility as they grow and change into mature markets.
One classic measure of a maturing market is an increase in merger and acquisition (M&A) activity. Larger, more successful businesses buy smaller businesses to get access to their market share, unique product lines, or other features. Smaller businesses team up to become larger and better take on the larger businesses.
The recent examples here suggest a market emerging from the shadows of formerly being a criminal enterprise. Additionally, the recent plunges we’ve seen in marijuana stock values may be representative of that maturing market as well.
The exact scope of the market is becoming clearer to investors, and they’re adjusting their expectations—and portfolios—accordingly.
Throw in some macroeconomic headwinds, and the picture clears still further. If marijuana becomes another legal, if questionable, vice-like tobacco and alcohol, it will likely be subject to the same economic pressures.
With inflation on a tear and ramping up prices at the gas pump and grocery store, marijuana purchases may decline somewhat as well. That’s what we’d expect from alcohol and tobacco, after all.
Concluding Views
Marijuana stocks were, generally, always something of a speculative venture to begin with. Just look at the differences in share prices between this year and last.
Hedge funds are getting out of the field. Prices are starting to find their seemingly natural levels. However, for the most part, there’s still a good reason to be bullish on the marijuana industry.
There’s still growth ahead for the industry. Prices are now sufficiently low to where a decent position can be established for the price of a moderate-quality television set. Seeing prices go upward from here—especially as further market consolidation takes place—wouldn’t be out of line at all.
Leaders like Tilray and Aurora Cannabis may still represent solid growth opportunities. It’s not worth betting the farm, of course, but a modest speculative flier herein could reap some appreciable growth later.
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